ONEOK Backs Off The Bakken

A strange thing has happened in the ongoing development of the Bakken oil producing region of the United States. While more than a few writers and analysts have talked about producers in the Bakken region suffering from too little takeaway capacity, a large pipeline operator has canceled plans to build a pipeline that would have carried crude from the Bakken region down to the Cushing, Oklahoma hub.

No Thanks, We're FineONEOK Partners (NYSE:OKS) had planned to build the Bakken Crude Express Pipeline to connect multiple points in the Williston Basin (part of the Bakken formation) in Montana and North Dakota, a top oil producing state, to Cushing. The pipeline would have been about 1,300 miles long, carried about 200,000 barrels per day and covered much of the same territory as the Bakken NGL Pipeline project that is underway at a cost of around $1.7 billion.

On November 27, though ONEOK Partners management announced that it had not received enough commitments to go forward, and that it was canceling the project.

A Ticket to RideI do not know what sort of financial terms ONEOK Partners was looking for, but it sounds like major producers in the region like Continental Resources (NYSE:CLR), Hess (NYSE:HES) and Whiting (NYSE:WLL) weren't jumping at the chance. That's a little odd, given that groups like the North Dakota Industrial Commission and U.S. Energy Information Administration, not to mention oil companies themselves, have decried insufficient takeaway capacity as a problem and pointed to price differentials of nearly $10 per barrel as a consequence.

While the prices can certainly vary, it generally costs about $2 to $6 per barrel to transport oil by pipeline. Rail prices have become more reasonable (it used to cost as much as $15 per barrel or more in some cases), but it still costs an estimated $6 to $10 per barrel to go with rail. So, again it is a little curious that ONEOK Partners couldn't get the commitments it wanted. On the other hand, rail shipment has some advantages - namely, a lot more freedom in the choice of destination. Pricing differentials are more favorable at refineries on the East Coast, and it seems as though the better pricing prospects there can offset the costs and limitations of rail transport.

At the same time, the rails have definitely been ramping up their service to the area. Union Pacific (NYSE:UNP), Berkshire Hathaway's (NYSE:BRK.A) Burlington Northern and Kansas City Southern (NYSE:KSU) have all been eager to replace or supplement lagging coal traffic with tankers of Bakken crude; Burlington Northern has recently boosted its Bakken oil-hauling capacity to 1 million barrels per day. Along similar lines, Enbridge (NYSE:ENB) (primary a pipeline operator) has formed a partnership with Canopy Prospecting Inc. to reconfigure a train yard at a retired coal-fired plant into a facility that will offload rail-borne oil for further shipment east through barges (initially) and pipelines (eventually).

Will ONEOK Find a New Project?While the cancellation of the Bakken Express project reduces ONEOK Partners' capital requirements for the coming years, it comes at the cost of future growth. At this point, then, I wonder how the partnership will redeploy its resources. Mergers and acquisitions are always a possibility, and there is likewise the possibility that the company may stand pat. That latter option could prove tricky, though. While MLP investors seem to have a complicated love/hate relationship with growth and the financing (debt) it takes to fund it, they like the increased distributions that new infrastructure projects ultimately bring to MLP investors.

The Bottom LineIt would seem like the cancellation of this pipeline project is a good reminder that "common sense" doesn't necessarily always make sense. While the Bakken area may indeed need more takeaway capacity, it doesn't sound like the producers are going to be indiscriminate about signing up for projects. At a minimum, this development would suggest that there's still ample opportunity for the railroads to drive growth from their particular wheeled versions of traditional oil pipelines.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.